*1777 An election to file separate returns by three affiliated corporations for 1922, precludes those three corporations, together with a fourth corporation which was brought into the group in 1923, from making a consolidated return for 1923 without the Commissioner's permission.
*835 These proceedings are for the redetermination of deficiencies determined by the Commissioner in income tax for the year 1923, as follows:
| Central Supply Co. (Docket 32751) | $3,927.67 |
| Stonega Coke & Coal Co. (Docket 32752) | 5,893.62 |
| Virginia Wholesale Co. (Docket 32753) | 7,491.19 |
By proper order the cases were consolidated for hearing and final determination.
The facts were submitted in part by stipulations, and in part by evidence, and there is no controversy as to such facts.
The only issue presented is whether or not, under the law and the facts, the three petitioners, together with another corporation, Crab *836 Orchard Improvement Co., were entitled to make a consolidated income-tax return for the year 1923.
*1778 FINDINGS OF FACT.
For the sake of clarity, it may be stated that there are six corporations named and involved in the transactions herein considered:
The Central Supply Co., hereinafter called the Supply Co.; Stonega Coke & Coal Co., hereinafter called the Stonega Co.; Virginia Wholesale Co., hereinafter called the Wholesale Co.; Crab Orchard Improvement Co., hereinafter called the Crab Orchard Co.; Crab Orchard Coal & Land Co.; and the New River Collieries Co. The two companies mentioned last are only incidentally associated in the general concept of the situation with which we are here dealing.
The Stonega Co. is a Delaware corporation, and in the coal-mining business. The Wholesale Co. is a Virginia corporation and is a wholesale mercantile business company. The Supply Co. is a Virginia corporation and is engaged in selling mine supplies to the Stonega and other companies. All three companies maintained their general offices together in Philadelphia, and their operating offices in Big Stone Gap, Va. From the date of their several organizations down to and including 1921, 1922, and 1923, the Stonega Co. owned 99 per cent of the stock of the Wholesale Co. and the Supply*1779 Co. They all kept their books and made tax returns on the calendar-year basis. For the year 1922, they elected to and did make separate income-tax returns.
Prior to September 15, 1923, the Stonega Co. owned no stock and had no connection with the Crab Orchard Co. On September 15, 1923, the Stonega Co. purchased all the stock of the Crab Orchard Co., and held such stock during the remainder of that year. The Crab Orchard Co. owned a lease to what is known as the Eccles Colliery, but did not operate said Colliery, the same being operated, prior to September 15, 1923, by the New River Collieries Co., which owned its stock. The Crab Orchard Co. seems never to have engaged in any kind of operation, and entailed no expense and realized no income. After the purchase of the Crab Orchard Co. stock by the Stonega Co., the Eccles Colliery was operated by and in the name of the Crab Orchard Co., and during that operation of 3 1/2 months in 1923 it suffered a loss of $157,338.57.
For the year 1923 the Supply Co., the Stonega Co., and the Wholesale Co. each realized substantial net profits, and the combined net profits of those three companies for the 3 1/2 months here involved were*1780 sufficient to offset the loss sustained by the Crab Orchard Co. during that time; hence, the companies desired to make consolidated return for the year 1923. The companies were informed that, by *837 reason of the fact that they had elected to make separate returns for 1922, it was necessary to obtain permission of the Commissioner to change to a consolidated return. Thereupon they went to the office of the collector in Philadelphia, and one of the men in that office advised the officer making the inquiry to write a letter and make the request for the change and attach such letter to the consolidated return. In pursuance of that advice, the consolidated return for the four companies, that is, the three petitioners and the Crab Orchard Co., was made, and attached to such return was the following letter:
MARCH 12, 1924.
COMMISSIONER OF INTERNAL REVENUE,
Washington, D.C.
DEAR SIR: During 1922 Stonega Coke and Coal Company owned all the capital stock of Central Supply Company and Virginia Wholesale Company except directors qualifying shares.
These two companies elected to file individual rather than a consolidated income tax return for the year 1922 purely for*1781 convenience.
Effective September 15, 1923, Stonega Coke and Coal Company acquired the entire capital stock of Crab Orchard Improvement Company.
The business of Stonega Coke and Coal Company is mining and selling bituminous coal and manufacturing and selling coke.
The business of Crab Orchard Improvement Company is mining and selling bituminous coal.
Because of the relationship of Stonega Coke and Coal Company to Crab Orchard Improvement Company, Commissioner is requested to consolidate the income of Stonega Coke and Coal Company with the subsidiaries, namely, Central Supply Company, virginiaWholesale Company, and Crab Orchard Improvement Company, for the year 1923 and subsequent years.
Yours very truly,
(Signed) J. F. BULLITT,
Vice-President.
That consolidated return showed a net profit for the four companies (after giving effect to the loss of $157,338.87 sustained by the Crab Orchard Co.) of $1,454,385.67, with a tax of $181,770.74, which tax was paid by the Stonega Co.
Sometime about December, 1926, or early in 1927, a revenue agent audited the books of the companies here involved, and made a report on the same. That report denied the right to make a consolidated*1782 return for 1923 and made two adjustments, one of $18,838.95 and another of $110, favorable to the Stonega Co. That report was approved by the Commissioner and resulted in the determination of the deficiencies involved in these proceedings.
It may be further pointed out that in the event it be decided that petitioners were entitled to make a consolidated return for 1923, then, by reason of the adjustments made as stated above, the Stonega Co. will be entitled to a refund of $2,341.12.
*838 OPINION.
LOVE: As indicated in our opening statement, the only controverted issue in this case is whether or not, in view of the facts as set out in our findings of fact and under the law, the petitioners, together with the Crab Orchard Co., are entitled to have their income-tax liability computed on a consolidated return for the year 1923.
Petitioners urge five propositions or points as bases for their contentions that they are so entitled:
1. The equities of the case are all with the petitioners.
2. The Act of Congress did not require the petitioners to get the consent of the Commissioner of the Revenue for the filing of the consolidated return - they had the absolute*1783 right to file the same without getting the consent of the Commissioner.
3. Petitioners followed literally the regulations of the Commissioner with reference to companies which became affiliated during a taxable year. In such case the consent of the Commissioner to the filing of a conslidated return is not required.
4. Equity will consider that as done which should have been done.
5. The last sentence in Section 240 of the Act of 1921 is unconstitutional and void.
In this case it may be conceded that the Crab Orchard Co. was not affiliated with petitioners prior to September 15, 1923, and that subsequent to that date the four companies were affiliated. Section 240(a) of the Revenue Act of 1921 is the applicable statute in this case, and is as follows:
SEC. 240. (a) That corporations which are affiliated within the meaning of this section may, for any taxable year beginning on or after January 1, 1922, make separate returns or, under regulations prescribed by the Commissioner with the approval of the Secretary, make a consolidated return of net income for the purpose of this title, in which case the taxes thereunder shall be computed and determined upon the basis*1784 of such return. If return is made on either of such bases, all returns thereafter made shall be upon the same basis unless permission to change the basis is granted by the Commissioner.
With reference to points 1, 4, and 5 presented by petitioners, we fail to perceive the pertinency of any of them to the issue in this case. The right of two or more corporations to file a consolidated return is not an inherent right. It is merely a privilege granted, or a duty imposed by Congress under certain stipulated conditions. Congress certainly had the constitutional right to prescribe such conditions as it deemed proper. As an administrative measure, Congress lodged with the Commissioner discretionary authority to grant, or to refuse to grant, permission to change from one method to another after an election had been exercised. It may be granted that Congress meant that discretion to be the exercise of a sound, and not capricious discretion. A suggestion or showing that he has *839 refused to do what he was expected to do, or even what some other person would probably have done, falls far short of a showing that he has been guilty of an abuse of discretion.
We fail to perceive*1785 that there are any maxims or principles of equity pertinent in the case. Petitioners have no equitable right to file a consolidated return. Their right, if any they have, is a statutory right. If they bring themselves within the terms and conditions of the statute, their claim should be granted. If they fall without the ambit of the statute, their claim can not be granted.
That brings us now to a consideration of the second and third points presented. Petitioners contend, first, that by reason of the fact that in 1923 a fourth corporation not therefore affiliated with the three that exercised the election for 1922, came into the group, there came into being a new taxable entity, which taxable entity had made no election and hence had a right under the statute, as well as under the regulations, to make a consolidated return. Petitioners' counsel in his brief presents a forceful argument in support of the contentions last above noted, and were it a case of first impression, would call for an extended discussion. The issue, however, has been elaborately considered and discussed in several decisions by the Board, and definitely decided adversely to petitioners. See particularly*1786 . See also ; .
If permission were necessary, then petitioners contend that it should be held that, in view of the fact that they accompanied their return with a letter requesting the right to change, and no affirmative action was taken denying such request for more than two years, by reason of such silence on the part of the Commissioner, he should be held to have consented to the change. The statute certainly contemplates a request being made, with a statement of grounds for such request, prior to the filing of the return, and an affirmative answer. Simply because the Commissioner fails to answer promptly can not be held to estop him from denying such request at a later date when his office force reaches that return in its auditing work. See ; ; ; affd., *1787 .
Reviewed by the Board.
Judgment will be entered for the respondent.
LANSDON, MARQUETTE, ARUNDELL, and MURDOCK dissent.